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Barnes & Noble Talks Nook Spinoff, Warns Of More Red Ink

For the past year-plus, it has been fairly clear that a major reason Barnes & Noble has not come to the same fate as bankrupt rival Borders Group was its commitment to the Nook e-reader. Now, the bookseller says it may separate the business from its core operations.

In a release Thursday, Barnes & Noble touted the e-reader’s rapid growth, reporting that sales of the Nook family of devices were up 70% from a year ago during the nine-week holiday period. Sales of associated digital content – e-books, apps and periodicals – were up 113%.

With the company forecasting digital content sales of $450 million in 2012, and projecting a run rate of $700-$750 million by the end of the fiscal year, it comes as little surprise that the Nook business is an attractive piece of the portfolio.

It is more of a surprise that Barnes & Noble is evaluating the platform for a potential separation, given the questionable value in what would be the remainder of the business. Brick-and-mortar retailers have been struggling to compete with online rivals for years, a trend that appears to be picking up steam, and those that have failed to adjust, like Borders, have gone by the wayside.

Barnes & Noble put itself on the block last year, but after failing to find a buyer accepted a strategic investment from John Malone’s Liberty Media. Now the company says it could spin off what is arguably its most attractive asset.

“We see substantial value in what we’ve built with our NOOK business in only two years, and we believe it’s the right time to investigate our options to unlock that value,” said Chief Executive William Lynch. “We have a large and growing installed base of millions of satisfied customers buying digital content from us, and we have a NOOK business that’s growing rapidly year-over-year and should be approximately $1.5 billion in comparable sales this fiscal year. Between continued projected growth in the U.S., and the opportunity for NOOK internationally in the next 12 months, we expect the business to continue to scale rapidly for the foreseeable future.”

The success of the Nook has come in a market that is growing increasingly competitive. Where it once competed with the Amazon Kindle and other e-readers, the Nook is now fighting for consumer intention with the likes of Apple‘s iPad and other tablets like the Kindle Fire.

Along with the potential Nook spin, Barnes & Noble reported overall holiday sales results. The company’s brick-and-mortar business was not a disaster – sales were up 2.5% overall and 3.4% on a comparable store basis – but paled in comparison to the BN.com and Nook side of the business, which saw gains of 43% overall and 52% on a comparable basis.

The growth of the Nook business has not come cheap, and investing in it certainly was a factor in Barnes & Noble’s losses in 2011, which the company now expects to reach $1.10-$1.40 per share, far beyond the 63 cents analysts estimate. The company admitted to overestimating consumer demand for the black-and-white model of the device, which hurt when sales fell short of expectations.

Morningstar analyst Peter Wahlstrom said the cost of growing the Nook business may be turning off investors who were counting on Lynch to turn Barnes & Noble into a major revenue growth engine. Spinning off the unit could attract a different type of investor with more of a value focus.

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